In an era of heightened tariffs and economic nationalism, China is talking about free markets. Beijing wants to increase market pressures to spur companies toward greater efficiency and innovation. Private firms will be given a freer hand, and highly indebted SOEs that don't make the cut may be allowed to fail.
What's Happening
The central government in late May released "Opinions on Improving the Modern Enterprise System with Chinese Characteristics". We believe the guideline, along with the adoption of the "Private Sector Promotion Law" in April, is part of pattern: Beijing is exposing firms (private and state owned) to greater market rigor.
Why It Matters
Beijing is reaffirming market forces to make businesses more competitive. The steps follow a yearslong initiative to defuse debt risks. Now it's eyeing a more constructive phase, we believe, where entities may not only survive but flourish.
The move may stabilize economic growth amid an increasingly fraught external environment. It is also addressing complaints from offshore governments that Chinese businesses are excessively subsidized to gain unfair advantages. Such misgivings have prompted some countries to impose restrictions on Chinese exports and overseas investments.
We assume Beijing has been encouraged by recent domestic advancement in electric vehicles, chipmaking, AI and clean energy, which have flowed largely from the private sector. The government now aims to replicate that advancement in other sectors, and is seemingly happy to let private firms take the lead.
What Comes Next
Privately owned entities will gain more access to capital markets. The outstanding bonds issued by private firms account for only less than 3.5% of the onshore market. We believe this number will rise.
The measures will change corporate credit profiles, both the stand-alone credit profile (SACP) and the government support likelihood. Investors will likely put more focus on the SACP and credit spreads will become more differentiated.
Chart 1
We expect market discipline is necessary to increase efficiency. The government will strike a balance between promoting market discipline and controlling debt risks. Entities, including state owned enterprises (SOEs), that fail to align with policy goals may have to exit or reorganize with other entities.
We also expect policymakers to maintain their hold on key strategic sectors and technology directly through state-led investment or indirectly by mixed-ownership investment.
Background In Brief
In December 1978, China initiated reforms to transition from a planned economy to a market economy. In recent years growth has slowed, and the consequences of very high growth have become apparent. The focus subsequently shifted to deleveraging and financial risk control.
Now the government aims to shift the economic model to focus on high-quality growth. Specifically, under the mentioned policies, the government has set out the following objectives:
- Promote corporates to improve the market-oriented operation and innovation.
- Encouraging collaborative innovation between large firms and smaller ones;
- Pushing eligible SOEs to gradually diversify ownership structures;
- Providing stronger legal protection to private businesses;
- Supporting private capital to invest in emerging sectors, ensuring fair market access; and
- Improving private firms' access to capital markets, and help them accelerate the collection of accounts receivable.
Writing: Jasper Moiseiwitsch
Related Research
- China Default Review 2025: Tariffs To Cap Tolerance For Big Hits, April 28, 2025
- Can China's Local Governments Still Afford To Support Their SOEs?, March 23, 2025
- China Renewables Brief: Market Pricing Will Make Sector More Volatile, Feb. 12, 2025
This report does not constitute a rating action.
| China Country Specialist, Corporate Ratings: | Chang Li, Beijing + 86 10 6569 2705; chang.li@spglobal.com |
| Research Assistant: | Melody Peng, Hong Kong |
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